How to Estimate Your Estimated Taxes in Your First Year of Business
April 15th is the deadline for filing your estimated taxes for the first quarter of the year. But, how can you estimate what you will owe in taxes if this is your first year in business?
Most married family child care providers don't pay quarterly estimated federal taxes because their spouse has enough withheld from his paycheck to cover the provider's taxes. But, whether you are married or not, trying to determine how much, if anything you should pay for estimated taxes can be difficult in your first year of business.
IRS rules say that you must pay in at least 90% of the taxes your family owes each quarter of the year or pay a penalty.
The estimated tax form is IRS Form 1040ES Estimated Tax. Do not try to follow the instructions to this form to determine how much in estimated taxes you will owe. They are too complicated and don't take into account how to determine your house expenses.
You will owe federal Social Security/Medicare and federal income taxes on your profit. Your profit is determined by subtracting your business expenses from your income.
Your business income includes parent fees, Food Program reimbursements, subsidy payments for low income children, and grants. Add up the amount you received from January 1st through March 31st. Don't include any money you earned during that time, but did not receive by March 31st.
Some business expenses are easy to calculate for the first three months of the year. Adding up the cost of the items you purchased directly for your business (toys, supplies, equipment, etc.) is relatively easy. Add up the number of meals and snacks you served during this time and multiply by $1.40 for breakfast, $2.61 for lunch and supper, and $.78 for snacks (2022 rates). Multiply the number of miles you drove your car primarily for your business by $.56 per mile (2021 rate).
You can also deduct items you bought for your business (smoke detectors, fire extinguisher, toys, etc.) before your business began.
Other expenses are much more difficult to determine. This is because you are entitled to claim a portion of your house expenses (property tax, mortgage interest, utilities, house insurance, house repairs, and house depreciation), and a variety of other expenses used by your business and your family. These include: cleaning supplies and household supplies (light bulbs, paper towels, toilet paper, etc.).
Lastly, you are entitled to claim depreciation expenses on all items you owned before you went into business: furniture, appliances, and hundreds of household items.
Rather than trying to estimate all of these expenses, here's a shortcut: Add up all your income and multiply it by 20%. This is a rough estimate of how much you will owe in federal taxes for the quarter.
Continue to use this 20% estimate for the next three quarters of the year. The deadline for the estimated tax payments for the rest of the year are: June 15th, September 15th, and January 15th. If it turns out that the 20% you paid is too much, you will get a refund at the end of the year. If it's too little, you will owe some additional taxes when you file your tax return. It's highly unlikely, however, that you will owe any penalty because you will meet the 90% goal as described above.
You can avoid filing the federal estimated tax forms by having your spouse withhold 20% of your profit from his paycheck for the rest of the year.
State Estimated Taxes
Lastly, you may have to pay estimated state income taxes as well. Contact your local state department of revenue to get these forms. You should be able to determine your state tax rate, by looking at your last year's tax return. If your tax rate was 4%, multiply your child care income (before deductions) by at least 1% less than that to estimate your state income taxes.
Because your state taxes are a lot less than your federal taxes, any penalty you may owe will be extremely small.
Tom Copeland - www.tomcopelandblog.com
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For more information about filling out the estimated tax forms, see my Family Child Care Tax Workbook & Organizer.
